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Building a socially responsible investment portfolio.

Two years ago, Kathy Vandergrift asked me to design an investment portfolio that helps build an economy that cares for creation, treats people with respect and dignity, and contributes to change where it’s needed most. The portfolio also needed to grow at a reasonable rate to help meet the expenses associated with aging – to avoid becoming a burden on her children in her later years. The following are a few of the key considerations I worked through in my journey to implement this mandate. 

In building a portfolio like this, I need to balance the idea of “doing good” with achieving the required rate of return necessary to generate income when no longer working. I also need the investment options to be what we call “on-book,” meaning they trade on an exchange or can be purchased via offering documents from a recognized and regulated entity. 

So I started with the traditional negative screens to remove the typical “sin” sectors like guns, tobacco, defense and adult entertainment. Many consulting groups will help with this but key distinction goes to S&P Ratings and Morningstar, which we subscribe to, for its ability to drill deep into the data. I then filtered out certain undesirable sectors or businesses that have clear adverse effects on creation. Recently, these screens have been improved so I can now see into a company’s operations to determine sources of revenue from various sectors or business lines, their representation on their board, their diversity across employees, or their share voting structures. 

DRILLING DOWN
I then moved to a more qualitative review of what sectors and businesses I would like to support with investor dollars. As I allocate capital to these companies, I implicitly support what they are doing. This requires lots of research on which companies are contributing to the big shift that is required to move the needle on caring for our environment and making society a better place. Clearly more judgement and less number crunching is required at this step, and frankly, it’s the most difficult. 

Once I filtered down through the layers, I ended up with a list of companies to perform traditional security analysis on. Namely, what is the business model and growth plan? Who are the key players and managers? What are the valuations and growth expectations and is the company trading at an attractive entry point today? I ended up with some companies that I will watch for the time being and ones that I’m confident owning. 

Then I can assess a client’s risk tolerance, goals and time horizon to decide on an asset allocation and deployment of this capital. I blend these carefully selected companies together with specific green bonds (ones that are required to use the proceeds in specific ways that “greenify” a company’s operations or invest in clean sectors) and with traditional Alternative investments (such as real estate, market neutral hedge funds and commodities like gold) to build a robust and diversified portfolio. 

The last step is a clear and disciplined monitoring process. This involves refreshing the quantitative data on how a company is adhering to these socially responsible investing criteria but also to valuation and growth metrics. I rebalance the portfolio to keep risks in line and to add new ideas or remove ones that aren’t working, on a periodic basis.

We have found that the returns generated by these portfolios do not lag their broad market benchmarks. In the end, I believe that a portfolio can be built that achieves solid and consistent returns and satisfies the objective of investing capital in ways that contribute to making our world a better place by supporting businesses and business people that are doing their best to do just that. It’s not perfect and will require adjustments and continual learning, but that too is part of my mission. 

  • Brent is the Portfolio Manager & Executive Director of CrossPoint Financial and HollisWealth in Ottawa (ac.laicnaniftniopssorc@tnerb). Feel free to contact Brent to find out more about the individual investments in this model portfolio.

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